Fight for market share threatens carriers' contract negotiations

11/6/2017

Carriers risk securing weaker rates during upcoming negotiations for 2018 contract rates due to a failure to maintain capacity discipline following the peak season, analysts at Drewy say.

“Lines have, for some unapparent reason, suddenly eschewed some of their normal modus operandi,” Drewry said. “In particular, there has been a complete lack of service suspension announcements for the traditional shipping slack season in the fourth and first quarters.”

This would be understandable if demand and freight rates were strong, but spot prices had been on a downward trend for a number of months, Drewry said.

This was most significant in the Asia-Europe trades, where annual contract negotiations were already underway.

“Every weekly deflation to spot rates further weakens carriers’ negotiating position,” Drewry said.

Rates were falling not because of any weakening in the supply-demand balance but because of undercutting in the market. Rates were falling despite improving ship utilisation levels.

“It could be that strong fundamentals are what have made carriers more resistant to withdrawing services,” Drewry said. “If that is the thought process, that would miss the point. They have increased their exposure to the risk of locking into much lower prices for next year than they might have got had they temporarily removed some capacity.”

Traditionally, long-term contract rates are set during the weak quarters following the peak season. In the past, carriers have reduced capacity to boost rates, and therefore their negotiating strength, during this period.

Drewry also noted that blankings were at a lower level this year as carriers reduced the number of void sailings.

“It appears that lines have preferred to win customer loyalty to their alliance through consistent and reliable services, at the expense of adjusting capacity to support flagging rates,” Drewry said. “If so, that could be a decision that comes back to haunt them when the ink is dry on the 2018 contracts.”